More on Hate Groups and Tax Exemptions [Updated]

On the Cooking the Books Podcast, Phil Hackney and I discussed Michael Kunzelman’s story (that we both spoke to him about) on white nationalist groups that are tax exempt. Over at the Volokh Conspiracy, Eugene Volokh asserts that the IRS cannot constitutionally deny tax exemptions to “hate groups” based on their views, abhorrent that they may be.

Since he name-checks me and fellow Surly blogger Phil Hackney, I figured it was worth responding to his piece. (It’s worth noting that we’ve generated a fair amount of Twitter discussion already; you can catch that in a number of threads, including this one and this one.)

I don’t intend to be comprehensive here, but I want to make five main points:

Leaving Aside the Content of Speech, It’s Not Clear These Groups Qualify As Tax-Exempt

The New Century Foundation claims tax exemption as an educational organization. Its stated charitable purpose is

to encourage sensible public policy on race and immigration. We believe accurate knowledge and the willingness to face potentially unpleasant truths — both of which are conspicuously absent in the public arena — are essential to this task. We also believe the European-American majority has legitimate group interests now being ignored.

While the Code is silent about what it means to be an educational organization, the Treasury Regulations have fleshed it out. Under the regs, educational activities encompass two broad categories:

“The instruction or training of the individual for the purpose of improving or developing his capabilities.”

As best I can tell, looking at the New Century Foundation’s purpose and 990, it doesn’t claim to be a tax-exempt educational organization under this category. Rather, it must do so under the second:

“The instruction of the public on subjects useful to the individual and beneficial to the community. An organization may be educational even though it advocates a particular position or viewpoint so long as it presents a sufficiently full and fair exposition of the pertinent facts as to permit an individual or the public to form an independent opinion or conclusion. On the other hand, an organization is not educational if its principal function is the mere presentation of unsupported opinion.”

Honestly, I doubt these organizations meet this second prong. I’m entirely sure that it advocates a particular viewpoint, and I doubt it provides a full and fair exposition of the pertinent facts.

[Update 12/30/16] Phil pointed out to me that the constitutionality of these regs was questioned in Big Mama Rag, 631 F. 2d 1030 (D.C. Cir. 1980). In response, the IRS issued Rev. Proc. 1986-43. Under the revenue procedure, advocacy by an organization generally isn’t educational if (a) the views that make up the majority of its communications aren’t supported by facts, (b) the facts it uses are distorted, (c) it uses inflammatory and disparaging terms, or (d) it doesn’t take into account the background or training of its intended audience. Even under the Rev. Proc., I’m skeptical that these organizations meet the qualification for “educational.”

Of course, I haven’t investigated the organization fully, and could certainly be wrong. Still, courts have indicated that the burden is on the putatively exempt organization to demonstrate that it meets the requirements of exemption. SeeNationalist Movement v. Comm’r, 37 F.3d 216, 220 (5th Cir. 1994) (“The burden is on the Appellant to prove that it is entitled to the exemption.”). I’d be surprised if these white nationalist groups could carry that burden.

Even If They Are Exempt, They May Fail the Fundamental Public Policy Test

In Bob Jones Univ. v. United States, 461 U.S. 574 (1983), the Supreme Court endorsed the IRS’s 1971 ruling that found an extra-statutory “public policy” requirement to qualify as tax-exempt. That is, based on the common law of charitable trusts, the IRS determined (and the Supreme Court agreed) that an would-be exempt group that violates a “fundamental public policy” does not qualify as tax-exempt.

Volokh acknowledges this, but categorizes that “fundamental public policy” rule as relating solely to actions (in the case of Bob Jones University, racial discrimination), and not to what the organization advocates.

He may be right, but the Supreme Court doesn’t provide contours for what “fundamental public policy” means. It’s worth noting that Bob Jones wasn’t the first case to bless the fundamental public policy rule; rather, it just allowed the rule to be applied to religious schools that believed that the Bible mandated some amount of racial discrimination.

In fact, in 1971, the D.C. Circuit approved the use of fundamental public policy to revoke the exemptions of non-religious private schools that were racially discriminatory. Again, the court found the public policy requirement rooted in the law of charitable trusts, which it describes thusly: “All charitable trusts, educational or otherwise, are subject to the requirement that the purpose of the trust may not be illegal or contrary to public policy.” Green v. Connally, 330 F. Supp. 1150, 1159 (D.D.C.), aff’d sub nom.Coit v. Green, 404 U.S. 997, 92 S. Ct. 564, 30 L. Ed. 2d 550 (1971) (emphasis added).

The “purpose” language is, of course, dicta, but it reflects how the IRS appears to have read the requirements. On at least two occasions, the IRS has rejected the exemption applications of organizations that advocate actions contrary to a fundamental public policy. Both Phil and Volokh mention the Principle Voices of Polygamy ruling (PLR 201323025), which rejected the application of an organization intended to education about polygamous families and provide support to such families.

Almost four decades earlier (before Bob Jones, but after Green), the IRS release Rev. Rul. 75-384, where it held that a group intended to educate the public about nonviolent protest and sponsor nonviolent (but illegal) protests failed the fundamental public policy rule.

And the fundamental public policy rule seems to (potentially, at least) undermine the idea of viewpoint neutrality. Green acknowledged that fundamental public policy could change as society changed. Necessarily it won’t be viewpoint neutral; while discrimination violates fundamental public policy, its opposite (broad inclusion? affirmative action?) doesn’t.

Normative Considerations

All that said, I largely agree with Volokh normatively, for a couple reasons. For one thing, I’m not a free speech absolutist, but I believe that robust free speech is important. Even where that speech is repugnant. I don’t believe that the government should shut down unpopular speech.

Second, provided the organization qualifies as exempt (that is, it meets, among other things, the requirements to be an educational organization), I don’t believe it properly belongs in the tax base. (Fellow Surly blogger David Herzig and I are working on an article right now that expands and explicates what I mean. This post is long enough already that I’ll leave the argument for that piece.)

Third, frankly, I think Green and Bob Jones are bad cases. That’s not to say that they didn’t serve an important instrumental purpose: discriminatory private schools were, in fact, trying to undermine desegregation by allowing white students to flee integrated public schools for segregated private schools. That went against 15-20 years of judicial decisions and legislative actions.

But importing a nebulous “fundamental public policy” standard from the common law of charitable trusts strikes me as a stretch. And it’s a vague enough standard that the IRS hasn’t been able to do much with it.

On the Other Hand

On the other hand, it’s probably fair to argue that the government shouldn’t subsidize bad speech. Just like “fundamental public policy” creates a definitional problem, “bad speech” has a definitional problem. But even if we assume particular speech is bad (and I think it’s fair to assume that white nationalist speech is bad), we run into the question of what constitutes a subsidy. Like I said, David and I argue that exemption itself is not a subsidy for qualifying entities.

But they do receive subsidies. Allowing donors to deduct the amount they donate provides a subsidy. Allowing donors of property to deduct the fair market value of the property without realizing and paying taxes on any built-in appreciation is a second level of subsidy.

Although I’m comfortable saying that the government shouldn’t subsidize bad speech as a normative matter, I’ll defer to Volokh on the constitutional contours of the question. That said, while he points out that there is precedent to suggest that the government can’t deny direct subsidies on the basis of viewpoint where it provides those subsidies broadly, the case he mentions refers to a state university denying money to pay for a student group printing a newspaper.

But I’m curious how that broad idea interacts with the fundamental public policy rule.

Discomfort

Even if it turns out that Volokh is right, I stand by my statement that we should be uncomfortable with the idea that the government is subsidizing white nationalist speech. If the Constitution requires such subsidy, so be it. But even if the government has no choice but to allow the exemption of these groups (with the concurrent deductibility of donations), we shouldn’t get comfortable with the idea. After all, the fact that individuals have the right to engage in abhorrent speech doesn’t mean that we need to become comfortable with the content of that speech.

One thought on “More on Hate Groups and Tax Exemptions [Updated]”

I will be interested in your follow up discussion that will perhaps describe flaws in the exemptions for unruly advocates of unpopular positions. The full and fair exposition of all the pertinent facts was a hard lift after Big Mama Rag. However, I think the IRS / Treasury got the methodology test in Rev. Proc. 86-43 about right cause it permits a variety of groups to offer their viewpoint (e.g. pro-vaccination / anti-vaccination) as tax exempts. The public policy argument to deny exemption is a bit tricky in discerning when a putative charity has crossed the line – what does the law state / what do the courts state? So criminal activity in violation of established law and court decisions . . .sure. Just not liking the words used by an organization because they appear hateful . . . not so sure. And what about using public policy to find new exempt categories . . . if public policy is good for denials is it also good for approvals? For example, serving special needs of elderly, conservation efforts, public interest law firms. If you do not like public policy to deny, do you also object when IRS / Treasury use it to expand the definition of charity? BTW: I do enjoy reading the offerings because they are timely and lively.

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